The risk-free (10y bond yield) rate is at 2.22% and it is below the Fed's interest rates bandwidth of 2.25%-2.5%. This will increase the Fed's pressure to reduce its interest rates as the current rates are no longer relevant and effective to manage the market expectation. This exposes the fragility of the risk appetite of the investors in the current market. Furthermore, there are some yield curve inversions which denote a forthcoming recession.
Is a recession coming soon?
A recession is highly likely to happen in our view. Why?
The US corporate debt-to-GDP ratio is giving a red light warning now.
Whenever there was a credit cycle peak in the past, there would be a US recession. The credit cycle peaks happened in 1990 (oil shock recession), 2000 (tech bubble burst), 2008 (US housing collapse, Lehmans bro minibonds) and 2018 (forthcoming recession).
The credit cycle had peaked in 2018 and the US-China trade war started in 2018 too. The world economies have started to slow down now due to the trade war. Consequently, the US bond markets are showing the low-risk appetite of the investors in the current market. With so many negative factors in this global environment now, a recession is inevitable.
No comments:
Post a Comment